Capital Structure Debt 40% Interest rate 5% Tax Rate 26% Equity 60% Risk Free rate 6%...
| Capital Structure | |||
| Debt | 40% | ||
| Interest rate | 5% | ||
| Tax Rate | 26% | ||
| Equity | 60% | ||
| Risk Free rate | 6% | ||
| RM | 13% | ||
| Beta | 1% | ||
| Working capital | 10% next year's sales | ||
| No terminal cash flows | |||
| Project 1 | Capital investment | 1,000,000 | |
| Year | Revenues | Expenses | |
| 1 | 850,000 | 680,000 | |
| 2 | 871,250 | 697,000 | |
| 3 | 893,031 | 714,425 | |
| 4 | 915,357 | 732,286 | |
| 5 | 938,241 | 750,593 | |
| 6 | 961,697 | 769,358 | |
| 7 | 985,739 | 788,592 | |
| 8 | 1,010,383 | 808,306 | |
| Instructions | |||
| a) Compute the cost of debt financing | |||
| b) Compute the cost of equity financing using the capital asset pricing model (CAPM) | |||
| c) Compute the waighted average cost of capital (WACC) | |||
| N.B. The capital investment is to be depreciatded as a 7 years asset | |||
| d) Evaluate the project by computing: 1) Net Present Value (NPV) 2) Internal rate of return 3) Payback | |||
| e) Decision is to accept or reject the projet (based on IRR and NPV) | |||
Look also at the effects of tax
Homework Answers
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Capital Structure
Debt
40%
Interest rate
5%
Tax Rate
26%
Equity
60%
Risk Free rate
6%...
The target capital structure for Acme is 60% debt and 40% equity. The risk-free rate is 2%. The m...
The target capital structure
for Acme is 60% debt and 40% equity. The risk-free rate is 2%. The
market risk premium is 5%. The beta of Acme against a relevant
stock index is 0.8. The pre-tax cost of debt for Acme is 4%. Assume
an effective corporation tax of 17%.
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